Treasurys fall for first day in six

DeborahLevine

SAN FRANCISCO (MarketWatch) — Treasury prices declined for the first day in six on Wednesday, giving back some of the prior session’s rally and pushing yields back to levels not seen since before the Federal Reserve’s last policy meeting more than a month ago.

Yields on 10-year notes
TMUBMUSD10Y, +0.61%
which move inversely to prices, snapped a five-day losing streak to rise to 2.03%. On Tuesday, it had ended at 1.99% which was the first time the yield on the benchmark security closed below 2% since March 7.

German government bonds’ new low

European markets are a little calmer with the euro actually rising. But that doesn't prevent a poor German government bond auction. Photo: Reuters

Yields on 5-year notes
TMUBMUSD05Y, +0.74%
traded at 0.87%, up from 0.85%, which was also their lowest closing level in more than a month.

Bonds remained down after a Federal Reserve report said the U.S. economy continued to grow at a “modest to moderate pace” over the last month. See story on Beige Book.

Bond investors parsed the so-called Beige Book, an anecdotal compilation of on-the-ground conditions about the economy, for clues whether officials on the Fed’s Open Market Committee are more or less inclined to extend or implement a new bond-buying program — what many have dubbed a third round of quantitative easing, or QE3. Read about Fed, QE3 in Currencies.

“The Federal Reserve left us all guessing whether it would need to adopt further measures to boost the economy when it depicted the nation as growing somewhere between modest to moderate,” said Andrew Wilkinson, chief economic strategist at Miller Tabak. “That’s neither strong enough to walk away from existing policy measures nor weak enough to muscle enough FOMC voters to change their minds.”

However, Dan Fuss, vice chairman at Loomis Sayles & Co., said the Fed would have data on their side should they decide to do QE in some form later.

“From the view that the economy is not strong enough in North America to get unemployment below 7%, it’s warranted,” he said. Fuss also co-manages the Loomis Sayles Bond Fund.

Bond yields were up throughout the session, giving back some of the decline Tuesday as Spanish debt yields jumped, reviving worries about Europe’s sovereign-debt problems and weighing heavily on equities. Read about bond rally Tuesday.

The rally in Treasurys in the last five sessions — starting even before the disappointing U.S. payrolls report for March — has brought yields back to a lower range that they had been in for months, in large part due to the European debt worries and to economic contraction being exacerbated by austerity measures.

“We’ve had a reversal of some of the good news,” said Anthony Valeri, fixed-income investment strategist for LPL Financial. Spain’s budget report “brought up the fears about Europe again. We’ve had no hint from the Fed of a QE3,” a disappointing U.S. jobs report, and not hint from the European Central Bank last week about further liquidity or easing measures.

“We’ve had, for two weeks, economic data that’s disappointed expectations, which gives credence to a larger degree to a slowdown that the bond market had ignored,” he said.

The range on 10-year yields has returned back to 1.90% to 2.10%, Valeri said They rose as high as 2.38% on March 19.

“Treasurys have given back a chunk of yesterday’s [Europe]-fueled gains as the U.S. Treasury prepares to offer a slug of long-end paper over the next two days,” said Bill O’Donnell, head of Treasury strategy at RBS Securities.

Analysts also noted that demand was very weak at a German bund auction Wednesday — the country didn’t even receive enough bids to sell as much as it needed to raise because yields were so close to their record low.

Like Treasurys, German debt is considered a safe haven so a lack of demand may indicate less interest in U.S. debt as well.

Ten-year bond auction

The government’s weak bond auction had little impact on yields. The Treasury Department sold $21 billion in 10-year notes at a yield of 2.043%. The auction is a reopening, meaning the notes sold carry the same maturity and coupon as the original issue, in this case sold in February. See more on Treasury auction results.

The auction is the second of three major sales scheduled by the government for this week. On Tuesday, the U.S. received decent demand for 3-year notes
TMUBMUSD03Y, +1.68%
; it will sell 30-year bonds on Thursday.

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